Unfair but balanced commentary on tax and budget policy, contemporary U.S. politics and culture, and whatever else happens to come up

Tuesday, February 09, 2010

Paul Ryan's "shadow budget" for the House Republicans

Perhaps I should address Paul Ryan's shadow budget, proposed on behalf of the House Republicans (although in public they are keeping as far away from it as they can).

To see the details, check out the first 4 pages of this CBO letter scoring it.

Key features, with my reaction to them, are as follows:

1)REDUCE BENEFITS FOR PEOPLE BORN IN 1956 OR LATER - Hey, unfair, I just missed being grandfathered here. More seriously, while I don't see why older people shouldn't also share in cuts if they can afford it (unless they take their haircuts elsewhere), clearly that would be a political nonstarter.

I do believe that Social Security should share in the overall move towards budgetary balance even though, as Krugman et al like to point out, if it were the only problem things wouldn't be especially dire. I would say that it ought to be placed on a sustainable stand-alone path that addresses the aging work force problem and that aims for generational balance - not because that is a fundamental principle (at all), but as a sound political economy convention. In other words, if particular age cohorts get benefit enhancement then generally they should pay for it (unless things have turned dire for them and it's effectively cross-generational insurance to increase their net take from the program).

2) SHIFT TRADITIONAL SOCIAL SECURITY TO INDIVIDUAL ACCOUNTS (FORMERLY KNOWN AS PRIVATIZATION) - Although I generally like greater consumer choice, within Social Security (and taking account of other retirement institutions) it's truly pointless. Republicans' aim may be simply to re-label the same checks as not coming from the government. Good luck pushing this after the 2008 stock market collapse, guys. See more discussion of privatization here.

3) MINIMUM SOCIAL SECURITY BENEFIT - A new proposed feature, apparently guaranteeing all workers with at least 20 years of earnings at least the earnings of a full-time worker making the minimum wage. This strikes me as a desirable feature, establishing more of a floor. It weakens the tax-benefit link, but workers don't really understand this anyway (so it shouldn't do much to increase distortions from the payroll tax). A pro-immigrant feature, given the 20 years point? Don't tell other Republicans. Relevant to surviving spouses who only worked part-time and whose deceased spouses also had low earnings? Anyway, I don't know how significant this in fact is, but it sounds reasonably promising.

4) REPLACE MEDICARE WITH VOUCHERS - On balance, I don't agree with this fundamental change to how healthcare for seniors is provided. Note also that its design appears to suggest declining real subsidies over time. Then again, we have a huge sustainability problem in healthcare. Note also the lack of risk-adjusting to the vouchers, and of anything to make the health insurance market work better. But I give it credit for being an honest conservative, pro-market approach to the problem, although I consider healthcare too fundamentally messed up for that approach to work. It thus appears to be the work of a Plato or Socrates compared to nearly everything else Republicans have been spouting for the last 10 years.

5) REPLACE EXCLUSION FOR EMPLOYER-PROVIDED HEALTH INSURANCE WITH A REFUNDABLE (!!!) TAX CREDIT - I strongly favor this type of change, which eliminates the bias of the current healthcare exclusion in favor of people in higher marginal rate brackets. Refundability is also obviously right design. Dollar caps on the exclusion make it, I'm pretty sure, much smaller over time. I hate running such health insurance as there is today mainly through employer programs, but one doesn't want to weaken that too much without other devices in place. Note also nothing else addressing adverse selection problems in health insurance. Still, once again we have a sane and coherent conservative policy, rather than the usual garbage like "Cut taxes to zero, conduct 5 wars at once, offend no politically powerful constituencies (indeed, throw as much money at them as possible), yet denounce Obama for the budget deficit."

6) GOVERNMENT SPENDING FREEZE - I addressed this in an earlier link when Obama cravenly proposed it (though for 3 years, not 10 like the House Republicans). This feature also appears carefully designed to implement as extreme a Herbert Hoover policy to the recession as possible (with apologies to Hoover himself, who actually was more flexible than this).

7) AT TIMES IDIOTIC BUT AT LEAST NOT OVERLY REVENUE-LOSING TAX CHANGES - People would be allowed to elect between a simplified tax system and the actual one. Since taxpayers would need to consider both options and presumably would want the one that was more beneficial to them, this would actually make the tax system more complex. Stupid idea. Consumption tax, levied at the business level, in lieu of the corporate income tax. Again this is dubious design - one needs to eliminate the income tax generally in order to get rid of it at the entity level. But again, we are at least as close to Earth here as the planet Mars in this proposal (perhaps closer), whereas Republicans these days more often sound like they are in an alternative universe.

Bottom line, I generally disagree with it, but I respect it as startlingly honest by Washington standards. By that I don't just mean that it fesses up to planning nasty things that the voters will hate, hence revealing what one might argue is the Republican's true "if-only-we-could" agenda. I also mean that it accepts the long-term budget constraint and, at least to a degree, sets out an intellectually coherent and recognizably conservative (in the sense of pro-market and not wild about redistribution) path, rather than being rabidly dishonest and self-contradictory, like Republicans demanding tax cuts, hands off Medicare, and an end to budget deficits.

Standing alone, it would be evidence that the Republicans aren't insane after all, and don't entirely reject the idea of governing. I wouldn't want them punished for the politically dicey aspects of this, if they actually were on balance interested in governing, given that one wants to encourage, not discourage, intellectually responsible behavior.

But given how I nonetheless interpret Republican behavior overall, including what they would actually do with legislative majorities plus the presidency (in Palin's case, this might mean nuclear war abroad and repression of political opponents at home), I find myself hoping instead that the Democrats successfully demagogue it to death.

About Me

I am the Wayne Perry Professor of Taxation at New York University Law School. My research mainly emphasizes tax policy, government transfers, budgetary measures, social insurance, and entitlements reform. My most recent books are (1) Decoding the U.S. Corporate Tax (2009) and (2) Taxes, Spending, and the U.S. Government's March Toward Bankruptcy (2006). My other books include Do Deficits Matter? (1997), When Rules Change: An Economic and Political Analysis of Transition Relief and Retroactivity (2000), Making Sense of Social Security Reform (2000), Who Should Pay for Medicare? (2004), Taxes, Spending, and the U.S. Government's March Towards Bankruptcy (2006), Decoding the U.S. Corporate Tax (2009), and Fixing the U.S. International Tax Rules (forthcoming). I am also the author of a novel, Getting It. I am married with two children (boys aged 24 and 21) as well as three cats. For my wife Pat's quilting blog, see Patwig’s Blog.